Facing The Fiscal Cliff: Congress' Next Showdown

David Wessel is a Pulitzer Prize-winning journalist, and serves as economics editor and columnist at the Wall Street Journal.

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Originally published on July 31, 2012 11:35 pm

In December, Congress is poised for another showdown on the deficit and taxes. If Congress doesn't act, 2013 will mark the end to Bush-era tax cuts that have been in place for a dozen years, and the beginning of automatic cuts to domestic and defense programs that would total $1.2 trillion over 10 years. The Congressional Budget Office says the combination of higher taxes and deep spending cuts could create a 4 percent reduction in economic output, a number big enough to throw the country into another recession. The culmination of higher taxes and spending cuts is being called the "fiscal cliff."

David Wessel joins Fresh Air's Terry Gross to talk about how the federal budget got to this point and the steps Congress could take to pull the nation back from the fiscal cliff. Wessel thinks there is a fundamental difference between the two parties "about how important and how big a role the government should play in our economy and that influences what you think should be done to cure the deficit."

Wessel believes one possibilty for compromise is to place "pretty tough restraints on spending, on benefit programs, like Medicare and Medicaid, which would be hard for the Democrats to swallow, coupled with some increase in taxes, that would be hard for the Republicans to swallow."

David Wessel is a weekly columnist and economics editor for The Wall Street Journal and writes the Capital column. His previous book, In Fed We Trust, chronicled Fed chairman Benjamin Bernanke's response to the global economic crisis of 2008. His new book is Red Ink: Inside the High Stakes Politics of the Federal Budget.

Interview Highlights

On the defense budget

"I think one of the interesting things that's happened in Washington in the last few years is that a lot of the conservatives are beginning to wonder about how much money we should spend on defense. It's not a simple liberal-conservative split anymore. And I suspect that despite Mitt Romney's promises about increasing the defense budget, even if he's elected, we'll see some severe pressure on how much do we really need to spend on defense."

On tax rates

"One reason why tax rates are where they are is because we have these sticker price tax rates in the tax code and then we have a tax code that is full of holes, like a piece of Swiss cheese ... and what a lot of people are saying is it's going to be very hard to raise tax rates but we have to raise money from the tax code. Well how can we do that? The way to do it is to have fewer deductions, loopholes, credits, these things that are basically subsidies ... they're almost like spending in disguise that we run through the tax code because that's become a politically easier way to do it. So pretty much everybody ... is looking for ways to reduce the amount of money that [goes into] these inefficient loopholes, credits and deductions in the tax code, as a way to either lower tax rates or raise money for the federal government [while] doing less harm to the economy.

On federal government employees

"The fact is that the federal government employs 4.4 million people, most of them, more than half are either uniform military personnel, or they're civilians working for the Defense Department or Homeland Security. If we fired them all, everybody, the president, the guy who's standing in front of the congressional office building to put you through the metal detector, if we fired all of them we'd save about $435 billion dollars a year, but the deficit we have is well over a trillion dollars. So the reason that this is significant is because it's a way to remember that ... most of the money that comes into the federal government goes right out again and does not go through the paychecks of federal employees."

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

TERRY GROSS, HOST:

This is FRESH AIR. I'm Terry Gross. You know that fiscal cliff that we're heading for? My guest today is going to explain how we got to its edge and what the consequences are if we go over that cliff at the end of the years. David Wessel is the author of the new book "Red Ink: Inside the High-Stakes Politics of the Federal Budget." He's the economics editor of the Wall Street Journal and writes the Capital column, a weekly look at the economy. He shared two Pulitzer Prizes and is the author of the previous book "In Fed We Trust: Ben Bernanke's War on the Great Panic." Wessel often contributes economic analysis on NPR's MORNING EDITION and the PBS series "Washington Week."

David Wessel, welcome to FRESH AIR. Let's start with what is the fiscal cliff. I just want to start with something really basic that I know some people know the basics of this, but let's make sure everybody understands it before we go any further.

DAVID WESSEL: Last year, Congress and the president faced a crisis of sorts, and in order to get out of the crisis, they loaded a gun and pointed it at the American economy. And the bullets in the gun are that unless Congress and the president come up with some compromise that will reduce the deficit in the future, taxes will go up for almost everybody, and spending will be cut across the board, hitting defense particularly hard. And this happens at the end of December of this year.

The argument now is: What will Congress and the president actually do about this? There seems little chance they'll do anything about it before the election, and after the election, there's really only two months. If they don't do anything, then they'll pull the trigger on the gun, and, mixing metaphors a bit, the economy goes over the fiscal cliff, and everybody from the Congressional Budget Office to Ben Bernanke says that would be really, really bad for the economy.

GROSS: And explain why everybody says it would be bad. You know, on the one hand, if we cut defense and we raise taxes, that's a lot of money that the government saves. So why is it a fiscal cliff?

WESSEL: Because nobody, even the most vociferous deficit folks, think you should do all this all at once. It's a little bit like being overweight, and the doctor tells you OK, as of December 31, no food and water. That's not the kind of fiscal medicine that the economy needs.

What the economy needs is probably a little help to get growth going now and some discipline in the future, like a person agreeing not to eat so much ice cream and to exercise more, so that over the next decade, the economy can adjust to a federal government which is taking more in taxes, cutting more in spending or some combination thereof.

GROSS: So in the fiscal cliff scenario, do the taxes return to the pre-Bush tax-cut era?

WESSEL: Yes, taxes go up to where they were before President George Bush's 2001-2003 tax cuts. Now, it gets a lot of attention that that means higher taxes on the rich, and it does mean higher taxes on the rich, but there is a lot of these tax increases that would hit people throughout the income spectrum: the child credit that helps people at the bottom and the tax rates that people at the middle class pay.

GROSS: So you've been studying this very closely, like no one believes that there will be a deal before the election because that's too politically dangerous, compromise can be seen as very dangerous now in some circles. So say there's a serious effort to have a compromise or some kind of grand bargain between the end of the election and the beginning of the new year. Any idea what that compromise or grand bargain might look like?

WESSEL: Well, the easiest bargain to make would be to call the whole thing off for a year, and a number of politicians on both parties, including Mitt Romney, have basically called for that. So that's one option. The only way I see getting a compromise is something that does some pretty tough restraints on spending on benefit programs like Medicare and Medicaid, which would be hard for the Democrats to swallow, coupled with some increase in taxes that would be hard for the Republicans to swallow.

But it's going to be really hard because the two parties can't really negotiate now, so the pressure to fix it all after November will be so intense that the only thing they may be able to agree on is we don't want this to happen. There are a few people who think we ought to go over the fiscal cliff, and that'll really force the politicians to get their act together. That seems a little risky to me.

GROSS: So would you compare for us what President Obama and where Mitt Romney stand on what to do about avoiding the fiscal cliff?

WESSEL: Well, I don't actually think either one of them has spelled out what precisely what they would do to avoid the fiscal cliff, but they have contrasting recipes for what to do about the big deficit problem, that is how to fix it. Mitt Romney says you don't need to raise taxes. He would lower tax rates for everybody and make up for that by getting rid of a lot of deductions, credits and exclusions, although he isn't specific about them.

And he has endorsed the rather austere budget that Paul Ryan, the Republican from Wisconsin, has proposed. So basically he says I want to fix the deficit, I want to do it while lowering tax rates, getting rid of deductions and credits and cutting spending a lot.

President Obama thinks that's a mistake. He doesn't want to cut spending as much as Mitt Romney or Paul Ryan does. He does want to raise taxes, but he says that he'll only raise taxes on income over a quarter of a million dollars a year.

GROSS: So let's look at these plans for a moment. Let's start with Romney. Romney says he wants to cut tax rates and make rates that were already cut in the Bush era and then make up for it by cutting spending. What kind of spending cuts would we be looking at in that scenario?

WESSEL: Well, what Romney says is he wants a tax code that brings in as much money as today's tax code but does it with lower tax rates but fewer loopholes, deductions, credits and exclusions. He hasn't spelled out how he's going to do it.

If he's going to bring the deficit down, which he says he wants to do, and if he's going to do that while raising defense spending, which is also something he wants to do, then the burden of the spending cuts is going to have to come on the rest of the budget. And most of the rest of the budget is not government employees or national park service booths, most of the rest of the budget is Social Security, Medicare, Medicaid and a few other benefit programs.

So we'd have to cut there quite a bit, perhaps turning over some of the responsibility for those programs to the states and saying here's some money, less than you got before, see what you can do with this.

GROSS: And that puts the states in what position?

WESSEL: It depends. Some people think that the states could run, say, Medicaid, the health insurance program for the poor, more efficiently than the federal government lets them run it now. And they're in favor of giving them some money and letting the states figure out how to do it.

Other people say it's going to be very difficult for the states to save enough money to get by on what the federal government is likely to give them under a Ryan budget, Paul Ryan's budget, and that inevitably means the providers will get less money, and the patients will get less care.

GROSS: Now is Romney saying that under my plan we'd have to cut things like Social Security or Medicare, Medicaid?

WESSEL: He's not said he's going to cut Social Security in the harshest sense. He is in favor of raising the retirement age, the age at which you're eligible for these benefits that we give to the elderly. And he says yes, that we have to find a better way to deliver health care that costs less money. That means spending less on it.

If you don't like it, you say it's a cut. If you do like it, you say it's just making common sense, let's make it more efficient, we can't afford to have an increasing share of our budget going on health care. But he has not been yet forced to say look, this is the budget, this is what my budget would look like if I was elected president. The only thing he's done is endorse the Paul Ryan budget, the House Republican, which is a pretty tough and austere approach to this problem.

GROSS: Give us an overview of that budget.

WESSEL: Well, Paul Ryan, who is a very ambitious Republican from Wisconsin, believes that the government would function better, and the economy would function better, if taxes were lower, and if spending - if the government was a lot smaller. So for instance he would cut a lot of spending on things that are politically popular, like retiree healthcare for the military, which is - aren't going to be on the chopping block no matter who's president, and he's very much in favor of this turning over - turning the Medicare and Medicaid systems into health insurance much more like our 401(k)s, where you get a certain amount of money, you might call it a voucher, and you go shopping for these benefits.

And he thinks that with the competition that that would engender, we could get more for less, more service for less money.

GROSS: He used his Lasik surgery as an example of what he means.

WESSEL: He does. Lasik surgery, which is when they fix your eyes with surgery so you don't need glasses, is not covered by most insurance. And he had Lasik surgery, and he points out correctly that in this particular little market, the market actually worked as all the free market economists and politicians believed: There was competition; the competition forced the price down.

He thinks that applies to health care generally. A lot of other people think that's not the case, that we're not going to go around shopping for the best place to get chemo, or if you have a heart attack, you don't have 15 minutes to say OK, if I go to this hospital, higher quality, lower cost, if I go to that hospital, it's the opposite.

Whether this paradigm works is an open question. There's certainly a lot of evidence that: A, competition generally helps when people have choice; and B, health care may not be like buying soda pop or Internet service.

GROSS: So let's look at President Obama's plan for the budget and to reduce the deficit and the debt.

WESSEL: Well, the president - the reason I hesitate is that the president laid out a plan in his budget - that's the disadvantage of being president, you actually have to put some stuff on paper - but it doesn't fully incorporate the things that he has said he is willing to do. For instance, in the conversations he had last year with House Speaker John Boehner, he was willing to go much farther, the president, than he actually went in his budget.

But taking his budget at face value, basically he would have pretty tough restraints on domestic spending, he'd cut the defense budget, and he would make some money-saving changes to Medicare and Medicaid but not the ones as large as the ones that Paul Ryan and Mitt Romney is in favor of. And most significantly, he would get more tax revenue, and most of that extra tax revenue would come from people who make more than a quarter of a million dollars a year.

GROSS: And what's the rationale for that?

WESSEL: Well, there are two rationales. One is he talks about balance. All that means is: I don't think it's wise to cut spending to reduce the deficit, I think we need some extra tax revenues at the same time. If we don't have extra tax revenues, I think we'll have to cut spending so much that we'll regret it in the future. And secondly, the president argues that it's only fair. The people at the top have made more money over the last 20 or 30 years; they should have to pay more taxes.

He talks about that as giving back. He thinks it won't hurt the economy, and it's only fair. Fairness is, of course, an inherently political decision. He says it would be fair to tax the rich more. Mitt Romney says it's a tax on success, and we'd regret it.

GROSS: If you're just joining us, my guest is David Wessel. He's the economics editor and an economics columnist for the Wall Street Journal. He's also author of the new book "Red Ink: Inside the High-Stakes Politics of the Federal Budget." Let's take a short break here, then we'll talk some more. This is FRESH AIR.

(SOUNDBITE OF MUSIC)

GROSS: If you're just joining us, my guest is David Wessel, and he's the economics editor and an economics columnist for the Wall Street Journal. His new book is called "Red Ink: Inside the High-Stakes Politics of the Federal Government(ph)."

You have studied a lot about, you know, the history of the federal budget, not just where we are now. Do you think we're at more of an ideological impasse than we've ever been before in terms of, you know, trying to, you know, balance the budget?

WESSEL: I think there are some competing ideologies here, but we have to remember when we look back at history, the battles over this stuff are incredibly intense. There were the battles at the beginning of the 20th century about whether an income tax was a good idea, about whether to cut tariffs. There was the whole argument during the 1930's about what Franklin Roosevelt did and him attacking wealth and people - the big money interests fighting back.

There were big issues over the Vietnam War and whether that was - whether Lyndon Johnson really hurt the U.S. economy by refusing to raise taxes. So there have been pretty sharp differences before, and that even - that skips the Civil War and what happened during the Revolution and the years that followed.

But I think you put your finger on something that's pretty significant and which unfortunately gets lost in this tit-for-tat stuff that goes on in the campaign: We have a pretty clear contrast, when you think of it, between the two parties right now.

One wants less government; one wants more government. Neither one is really willing to come to grips with what that means. Republicans are a little reluctant to say who is going to lose their benefits as a result, and Democrats are a little reluctant to say who's going to have to pay more taxes as a result.

I don't think that the president's talk of over a quarter of a million dollars a year is realistic. I think most of the Democrats who think about the budget know that they're going to have to raise taxes on more people than just the top two percent. But there is this fundamental difference, and you can hear it in President Obama's rhetoric and Governor Romney's rhetoric about how important a role and how big a role should the government play in our economy, and that influences what you think should be done to cure the deficit.

GROSS: Let me just back up a second. You said a lot of people think that President Obama's being unrealistic when he says he could get the income that he wants by raising taxes on only the top two percent, he's going to have to raise taxes on more people. What's the rationale behind that point of view?

WESSEL: It's basically arithmetic. It's very hard to imagine bringing the deficit down to a reasonable, manageable level while cutting spending enough so that you only raise taxes on the top two percent of the population. The high-profile bipartisan deficit commissions, the one led by Erskine Bowles and Alan Simpson, the one led by Pete Domenici and Alice Rivlin, they all have much broader tax increases than just the top two percent.

And even some people who work for the president quietly admit that this is more of a talking point than a clear economic strategy. It doesn't mean that taxes have to go up now, but if you look over the next decade, it's very hard to imagine getting the deficit down to a safe level and only raising taxes on the top two percent.

GROSS: In your book "Red Ink," you ask how did we get here, where the debt is so large. And you point out lousy economy, big tax cuts, two wars that weren't paid for, expansion of Medicare to cover prescription drugs without any offsets to pay for it and a bad recession.

So if we look at the tax cuts, the two unpaid-for wars, the prescription drug benefit without any offsets to pay for it, those were all Republican plans. Can you explain how the Republicans, who are, you know, are now complaining that we're being fiscally irresponsible?

WESSEL: Well, I think - so if you're discovering just a little bit of hypocrisy in Washington, well, welcome to the club. But let's remember here, there are a lot of Democrats who have their fingerprints on some of this stuff. The Medicare prescription drug benefit was favored by many Democrats. Nobody was standing up in the floor of Congress and say I'm voting against this because we haven't found a way to pay for it.

And there weren't a lot of Democrats who wanted to raise taxes to fight the wars, even those who were in favor of them, let alone the ones who weren't. But I think there is a bit of a contradiction, and some of the Republicans are up front about it, and they say look, we don't like what happened in the 2000s. We think spending went up too much, and now we're trying to reverse that. I think that's what Paul Ryan would say.

Others of them have a very convenient amnesia, and they want to go back to Ronald Reagan's era, where Ronald Reagan, they think, cut taxes and restrained spending. But in fact, that's not really the right view of history. Ronald Reagan did cut taxes a lot initially, realized he had overdone it and then raised taxes, things that Grover Norquist doesn't actually like to talk about. And in many respects, he raised spendings. He failed to curtail the big expansion of benefits, although he did do a pretty successful fix to Social Security.

So I think there's a selective reading of political history, and there's also a view among some Republicans that what's important, particularly politically, is to be in favor of lower taxes, and don't worry about deficits so much. And so they'd rather harp on lower taxes and not worry about how do you get the deficit down, and there's quite a bit of that going around.

GROSS: You have a lot of interesting statistics and stand-alone facts in the book. I just want to run through some of those. Let's start with this: The defense budget is greater than the combined defense budgets of the next 17 largest spenders.

WESSEL: We have become the world's policemen, and it's very expensive. We don't know exactly how much the Chinese spend on their military, so the data may be a little bit forced, but if you look at what the military budgets are, as reported by people who try and do apples and oranges, the U.S. military budget is bigger than the combined military budgets of China, Britain, France, Russia, Japan, Saudi Arabia, Germany, India, Italy, Brazil, South Korea, Australia, Canada, Turkey and the United Arab Emirates, Spain and Israel all combined together. That's a lot of money.

And I think one of the interesting things that's happened in Washington in the last few years is that a lot of the conservatives are beginning to wonder about how much money we should spend on defense. It's not a simple liberal-conservative split anymore. And I suspect that despite Mitt Romney's promises about increasing the defense budget, even if he's elected, we'll see some severe pressure on how much do we really need to spend on defense.

GROSS: Is that because some conservatives are non-interventionists?

WESSEL: No, I think it's because they think that we can't take the burden for the whole world given our current resources. Some of them are non-interventionist, but some of this money is not spent in wars in Afghanistan. Some of this money is spent in congressional districts to build Coast Guard cutters. It's a tough thing to cut.

I mean, one of my favorite examples is the aircraft carriers. The United States Navy is required by Congress to have 11 aircraft carriers. Aircraft carriers were really important in the past. There's a big debate in the military about whether they even make sense now. The Navy wants to replace each of the aircraft carriers with a new one every five years for the next umpty-ump(ph) years at a cost of $11 billion a piece.

Every time they decommission one of these ships, it costs $2 billion to take a nuclear-powered aircraft carrier and take it out of service because you've got to take it apart and deal with all the nuclear reactors. So the scope of our military budget is really, really almost hard to grasp.

GROSS: David Wessel will be back in the second half of the show. His new book is called "Red Ink: Inside the High-Stakes Politics of the Federal Budget." I'm Terry Gross, and this is FRESH AIR.

This is FRESH AIR. I'm Terry Gross, back with David Wessel, author of the new book "Red Ink: Inside the High Stakes Politics of the Federal Budget." In fiscal year 2011, the federal government spent $3.6 trillion. That's $400 million an hour, more than $30,000 per American household. Wessel's book explains where the money goes and describes the controversies over how it's spent. Wessel is economics editor of The Wall Street Journal, and he writes the weekly column "Capital."

Here's another statistic from your book: Firing every federal government employee would not save enough to even cut the deficit in half.

WESSEL: Right. One of the things that people think when they think about the government is they think about all these federal employees, these much-maligned bureaucrats who are not working hard, and the taxpayers are picking up their tabs. And to be sure, some of them don't work very hard. So I'm not saying that every federal employee deserves to have the job they have, and there's an enormous amount of jobs security in the government that most of us don't have in the private sector.

But the fact is that the federal government employs 4.4 million people. More than half are either uniformed military personnel, or they're civilians working for the Defense Department or Homeland Security. If we fired them all, everybody - the president, the guy who's standing in front of the Congressional Office Building to put you through the metal detector - if we fired all of them, we'd save about $435 billion a year. But the deficit we have is well over a trillion dollars.

So the reason that this is significant is because it's a way to remember that most of the money that the government spends doesn't go to government employees. Most of the money goes to benefits of some sorts - for individuals, Social Security, Medicare, Medicaid, food stamps, grants to state and local governments for highways and sewage treatment plants. Most of the money that comes into the federal government goes right out again and does not go through the paychecks of federal employees.

GROSS: But I think it gets to one of the fundamental, hypocritical things about the American people. We as a people tend to want the benefits that we get - the, you know, Medicare, Social Security. I think a lot of the middle-class and wealthy are more indifferent about Medicaid, because that deals exclusively with the poor. But a lot of people don't want to pay taxes, but they want - they want their infrastructure. They want their health care and Social Security.

WESSEL: Right.

GROSS: Any comment on that?

WESSEL: Yeah. Well, in the book I make something of a hero of a guy named Doug Elmendorf, who most people have never heard of, who's the director of the Congressional Budget Office. And he's in the business of trying to speak the truth to the powerful people in Congress and the administration and the rest of us. And he once summed up the deficit in one very smart sentence, I thought. He said the fundamental problem is the American people want more in benefits - particularly for the elderly - than they're willing to pay in taxes. That tension underscores the entire deficit debate. You can't have more benefits and not pay more taxes as the people, in general. Yet that's what people really want.

GROSS: On a related note, another statistic from your book: one of every $4 the federal government spends goes to health care, and that share is rising.

WESSEL: Right. So somebody once said to me that the federal government has become a big military with a social insurance company on the side, and there's actually some merit to that view. And the federal government is spending more on health care because it covers more people, and because the cost of covering them has been rising inexorably. And despite the president's health care law, we haven't really got our grips around what to do about that.

And most of the people who are serious students of the budget on the left and on the right agree that finding some way to control health care costs is the one essential thing on the spending side of the budget. It's even a problem for the Pentagon. Bob Gates - the defense secretary for both President Bush and President Obama - said at one point that health care costs were eating the Defense Department alive. He made that remark in May 2010. In that year, the Pentagon spent more on health care - not for injured soldiers, but for their families and for military retirees - than it spent on fighting the war in Iraq.

GROSS: Let me get to another statistic from your book. The federal government gives up almost as much money from tax loopholes, deductions, credits and other breaks as it collects in individual and corporate income tax. Why is that a significant fact?

WESSEL: Because we have a lot of focus on tax rates. Should tax rates be lower? Would the economy work better if they were lower? And one reason why tax rates are where they are is because we have these tax rates, these sticker-price rates and the tax code, and then we have a tax code that's full of holes, like a piece of Swiss cheese. There's a break for doing this, a break for doing that. Some of them are pretty popular, mortgage interest deductions. Some of them are not really well understood, like a special tax break we give companies who are in manufacturing.

And what a lot of people are saying is it's going to very hard to raise tax rates, but we have to raise more money from the tax code. Well, how can we do that? Well, the way to do it is to have fewer deductions, loopholes, credits - these things that are basically subsidies, or they're almost like spending in disguise that we run through the tax code, because that's become a politically easier way to do it.

So pretty much everybody - Mitt Romney, Barack Obama, Simpson-Bowles, Domenici-Rivlin - is looking for ways to reduce the amount of money that these inefficient loopholes, credits and deductions in the tax code as a way to either lower tax rates or raise money for the federal government with doing less harm to the economy.

GROSS: And one of the reasons why loopholes are popular with lawmakers is that it doesn't count as spending. Like, you're giving your preferred people a break, but it doesn't go on the spending budget.

WESSEL: That's correct, and that's a very good point. So if you spend a dollar, then you're accused of being a spender, and that's evil. If you give somebody a dollar tax break, you're considered a hero because you've cut taxes, even though economically they're the same thing. Over time, that has forced a lot of social spending through the tax code, which has made the tax code pretty complicated, but it has also distorted the way people think about the federal government.

GROSS: My guest is David Wessel, author of the new book "Red Ink: Inside the High Stakes Politics of the Federal Budget." We'll talk more after a break.

This is FRESH AIR.

(SOUNDBITE OF MUSIC)

GROSS: If you're just joining us, my guest is David Wessel. He's the author of the new book "Red Ink: Inside the High Stakes Politics of the Federal Budget." He's also the economics editor and a columnist for The Wall Street Journal.

You write in the book the most salient and overlooked fact is that for most Americans, federal taxes have not risen over the past couple of decades. And you write, in fact, the share of income most American families pay in federal taxes has been falling for more than 30 years. So elaborate on that for us.

WESSEL: When you look at the numbers across the income spectrum, the share of income that's paid in federal taxes for the American people as a whole fell in the 1980s, rose in the 1990s, and then fell again in the 2000s. Now, one reason for that is that taxes don't cover federal spending. This year, taxes cover only about two-thirds of all federal spending. We borrow the rest. But if you look at the people say in the middle of the middle-class - the statistical middle 20 percent of the people - the share of their income that they're paying in federal taxes of all kinds has gradually come down over the last 30 years.

GROSS: Why has it come down?

WESSEL: Well, it's come down because that's the way we've written the tax law, and because they've had a smaller share of the income in the economy. As more of the income has gone to people at the top, more of the burden has been lifted from people at the bottom to pay taxes, but they've also enjoyed a smaller slice of all the income.

GROSS: But has the tax burden on the wealthy come down even more than it has on the middle-class?

WESSEL: There's more than one way to measure that. If you look at what share of income the top 1 percent pay in taxes, that has come down - not as much as people at the bottom, but that has come down. If you look at how much of the income the people at the top get versus how much of the tax burden do they bear, their tax burden has actually gone up.

So, for instance, in the 1980s, the top 5 percent of the population - according to the Congressional Budget Office - got about 23 percent of the income and paid 29 percent of the taxes. The top 5 percent in the 2000s averaged about 28 percent of the income and paid 40 percent of the taxes. Now, this doesn't mean they're starving. The people at the top, the top 1 percent, have seen a huge raise over the last decade, and most of that raise has gone into their pockets, not gone to the taxes. Their taxes haven't gone up as much as their incomes have.

GROSS: But say you look at the capital gains tax, which came down a lot to 15 percent. It used to be higher than that. It used to be in the 20s, and one time maybe in the 30s.

WESSEL: Correct.

GROSS: So who has benefited the most from that, and how has that affected the income that we get from taxes as a nation?

WESSEL: Right. That's a good point. If you get your income from dividends or capital gains, you pay taxes at a lower rate than a lot of people who get their income from wages. So that's one reason why Mitt Romney's average tax rate is so much lower, not only than those of middle-class Americans, but also from a lot of working rich Americans, because so much of his income comes in capital gains and dividends.

So it definitely means that there's less tax revenue coming into the federal government. The people who are against it say it's a waste of money. We should tax that like everything else and we'd be - we'd have more revenue and less deficit. After all, Ronald Reagan signed the Tax Reform Act of 1986, and at that time, the difference between capital gains taxes and wage taxes was eliminated. They were both taxed at the same rate.

The other side says, oh, but if we give people a tax break for capital gains and dividends, we'll get more investment, more growth and we'll all be better off. And there's a big running debate among academic economists - not only them, but, of course, among politicians - about whether the economy as a whole benefits from lower capital gains and dividend taxes or not. President Obama wants to raise these taxes. Mitt Romney doesn't.

GROSS: So, OK. This gets to something we were talking about earlier, which is tax loopholes. You say the federal government gives up almost as much money from tax loopholes, deductions, credits and all other tax breaks as it collects in individual and corporate income tax. So it all just kind of evens out?

WESSEL: No. It doesn't even out. It's that if you want to increase taxes, you have two choices to do it. You can close some of these loopholes and deductions and raise more money, or you can raise tax rates.

Why do we worry about raising taxes? Well, we worry about raising taxes because A, people don't like it, B, because it's not fair, but C, because it tends to interfere with the functioning of a market economy. I mean, every time you tax something, you get less of it.

So if you tax work or you tax savings, you get less of it. If you tax gasoline, people use less of it. So it can be a good thing or a bad thing. But when you make the tax code so complicated with all these loopholes, you have all sorts of weird things that people are doing that don't necessarily benefit the economy.

There are legions of people in American corporations who spend all their time not trying to figure out how to create new, wonderful medicines or use the Internet or how to make, invest in new plans. They spend their time looking at how - at the complicated tax system and figuring out how, for their company, they can game the system by doing this and that in a way that doesn't affect workers or a society at all, but just saves them money on taxes.

There's one company in the Midwest, Eaton Corporation. It's an old-line American company. They just bought an Irish company, and they're going to turn themselves into an Irish company to avoid paying U.S. taxes. That kind of stuff is - benefits people who have the money to do it, but doesn't benefit the society.

How do we make less of that? We have fewer deductions, credits and exclusions. We get more money for the government. The money can be used to lower rates. It can be used to reduce the deficit, and we have fewer of these distortions in the economy.

GROSS: So we talked a little bit about individual tax rates and how they compare to the past. Let's look at corporate tax rates. You write: The tax on corporate profits, which was created in 1909, is a shrinking part of federal revenue. In the early 1950s, it accounted for more than 30 percent of federal revenues. Last year, only 7.9 percent.

WESSEL: Right. So 7.9 percent was a little distorted by the recession. It's been more like 10 percent. But it's a shrinking share of the federal revenue. Now, why is that? Really, two reasons. One is capital is mobile and labor isn't. So governments have decided to go a little easier on taxing capital. So it's much - the U.S. government in the 1950s didn't have to worry about what the Irish tax rate was on corporations. Now it does.

Secondly, as one of the games that businesses play is if you organize your business so that you don't get hit by the corporate tax and you pay the profits as an individual, it may save you money. So a lot of people have done that, which means that a lot of business in America is done in the form of partnerships or other things that are not subject to the corporate tax.

And then finally what's happened is we've relied more and more on the payroll tax. Thanks to the expansion of Medicare, more of our wages and more of our government's income comes from the tax on payrolls, on workers' wages, and that has been a growing share of federal revenues, while corporate taxes have been a shrinking share.

GROSS: Is that in part because corporations have such effective lobby groups?

WESSEL: Yes, in part - in part because people believe that raising corporate taxes would hurt the economy more than it would bring in money. So, for instance, one of the things I found very interesting is there's a big debate about corporate tax reform and how we could have lower tax rates if we didn't have so many loopholes, deductions, credits and blah, blah, blah.

Neither Mitt Romney nor Barack Obama wants to raise more money from the corporate income tax. Both of them are talking about different ways so it brings in the same amount of money, but maybe helps the economy more. I think that's one of the side effects of a global economy. The U.S. government has to worry that if it taxes companies too heavily, that companies will move overseas. And they can do that now.

In 1950, it was harder to do that. As I said, capital is mobile and workers aren't - or are less mobile. So we'll have to find - now, it doesn't mean that we can't raise money from the owners of capital. It doesn't mean that we can't raise capital gains taxes or tax the people who are making $50 million a year for running a company or something like that.

So, for instance, when I talked to a number of CEOs - this always fascinates me - and I say to them: Would you be in favor of taxing your company less, but taxing your salary more? And a number of them say yes. And I say, well, if a dozen of you would say that on the record, I'd write a front page story on the Wall Street Journal about that. And then suddenly, they're no so interested in saying it.

(LAUGHTER)

WESSEL: No, people will be angry at me, and blah, blah, blah. But there are a number of people in business who will say privately we ought to raise taxes on upper-income people, and we ought to cut corporate taxes, because that would help us have more employment investment in the United States. That's pretty much the spirit of the Bowles-Simpson report, and a number of CEOs have actually signed onto that, but they don't exactly phrase it the way I did.

GROSS: I really like the quote that you end your book with. It's from Leon Panetta, who's now the head of the CIA.

WESSEL: Right.

GROSS: And he says I used to tell the students that we are either governed by leadership or crisis. And I always thought that if leadership wasn't there, then ultimately, you rely on crisis to drive decisions. In the last few years, my biggest concern is that crisis doesn't seem to drive decisions, either.

It's a pretty pessimistic, stalemated kind of quote. Do you think that that's where we are now? Where neither leadership nor crisis leads to any kind of decision?

WESSEL: Yeah. Pretty much. But I think there's two things to remember: One is we're really lucky now. The U.S. government is borrowing unbelievable sums of money at unbelievably low interest rates because the rest of the world is such a mess. Alan Simpson says we're the best-looking horse in the glue factory. I like to say that we're the world's tallest midget.

That won't go on forever. Someday we'll have a crisis. I don't know when, and it might not be for a long time. And the second thing is: Leadership sometimes comes from strange places. I mean, none of us who covered Ross Perot thought that we wanted him to be president. But a lot of us thought, hmm. He actually is forcing the politicians to come to terms with some of the issues of the day.

So we may discover that there's some hidden leadership out there that rises to the fore. So I'm not in despair yet, but it is hard to be optimistic. And Leon Panetta, in my experience, is one of the most optimistic people in Washington usually, and that quote from him at the end of the book is - underscores how severe the political paralysis in Washington is right now.

GROSS: Well, David Wessel, thank you so much for talking with us.

WESSEL: You're welcome.

GROSS: David Wessel is the Wall Street Journal's economics editor. His new book is called "Red Ink: Inside the High Stakes Politics of the Federal Budget." Coming up, Milo Miles reviews a new album from a father and son Roma brass band. This is FRESH AIR. Transcript provided by NPR, Copyright National Public Radio.